just 50 days left till year end…
You can still hear the squeals and screams from Halloween echo in the night wind. Stores have already started stocking Christmas. Santa Claus, stay in your lane! With the encroaching yuletide season comes a reminder that year end for tax planning purposes is creeping down the hall again and exiting the building again. This year take a moment and honor that pledge to get more organized before time runs out to make tax moves in 2021. This year when you share gratitude with friends and family over turkey, share your accountant’s phone number and make an appointment. Take 1 hour to review your business income situation and project what that income will cost you in taxes.
What needs to be paid to be deducted by December 31st:
- Expenses reported cash basis: rent, materials, subcontractors, utilities; all those expenses you would normally deduct in January can be deducted in December instead, if, paid by December 31st.
- Credit Card charges. In most circumstances the IRS views credit card charges as paid for cash purposes. The fact that you have committed to make the payment allows the charges to be included in this year end.
- Large Purchases on credit. Much like credit card charges loaned money can be used to record an asset purchase. The most common example of this is an auto. The IRS allows a first year depreciation tax deduction of the full cost of the asset up to a max of $ 1,050,00. The purchased asset must be a business asset and the purchase contract must be entered into before December 31st. So $500 down on a $50,000 asset that is financed still yields a $50,000 depreciation expenses deduction.
- 401K plan contributions must be made through a paycheck deduction for the employee by December 31st. The Employer has until the tax filing deadline for the business to make the employer contributions. The employee, December 31st.
What does NOT need to be paid to be deducted by December 31st:
- H S A : Health Savings Account. If you have a high deductible health plan and qualify for a health savings account, you must have one set up by year end. You have until April 15th to fund a H S A and still take the deduction in this tax year.
- IRA : You have until tax filing deadline April 15th to even set up an IRA account. The IRA must be funded by April 15th, but, it doesn’t even have to be set up at December 31st.
- Reimbusements and office in home allocations: Because you are allocating some of your personal expenses to your business you have already paid for those expenses. The allocation of expenses indirectly supporting the business can be made after the end of the year, like when you meet with your accountant.
In addition to reviewing your projected year end profit it is a good time to organize and prepare for the upcoming tax filing deadline. Identify all income and expense that are reportable sources. A reportable source for this case is anything you will receive a tax document for, et al: W2, 1099, 1099-R Pension or IRA, 1098 Mortgage interest statement, Investment Income 1099 Summary Statement. Identify each separate investment account by the account number. The account number is the best way to track multiple accounts when reporting for tax purposes. Make a copy of last years tax return and then make notes on the face of the return. You should note any changes to the prior year. And then you can estimate any amounts on the 1040 from last year that will change this year.
And one final note before you close you thought to 2021: did the year go for you financially like you had expected? What are your expectations for 2022? Make a note on the tax return and save it for next year. I like reviewing my notes from prior year’s tax meetings with my clients because I can make notes of their goals and then compare those notes to the current year. You should always use December 31 st and April 15th as 2 dates to review how well you are doing on your financial path.